This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "seek," "should," "will," and "would," or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other "forward-looking" information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management's beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to: •labor and other workforce shortages and challenges; •our dependence on principal customers; •the addition or loss of significant customers or material changes to our relationships with these customers; •our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends; •our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies •our ability to continue to grow sales in our hosting business •volatility of cryptoasset prices uncertainties of cryptoasset regulation policy You should carefully review the risks described in the final prospectus of our Registration Statement on Form S-1 (Reg. No. 333-261278) filed with the
SECon April 13, 2022, as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows. Executive Overview
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes and other financial
information included elsewhere in this Quarterly Report on Form 10-Q.
We build and operate Next-Gen datacenters which are designed to provide massive computing power. Our first facility was constructed in
North Dakotaand as of February 2, 2022is online and providing 55MW of energy and services to customers, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022. We signed an energy services agreement with a utility to power this facility. We provide energized space for customers to host computing equipment. Initially, these datacenters primarily will host servers securing the Bitcoin network but can also host hardware for other applications such as artificial intelligence, machine learning and other blockchain networks in the future. We have a colocation business model where our customers place hardware they own into our facilities, and we provide full operational and maintenance services for a fixed fee. We typically enter into long-term fixed rate contracts with our customers. Trends and Other Factors Affecting Our Business Regulatory Environment Our customers' businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies. As a result, they 27 -------------------------------------------------------------------------------- Table of Contents do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers' conclusions. To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations. As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congressand certain U.S.agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Networkand the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets. Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry. For instance, on September 24, 2021, Chinaimposed a ban on all crypto transactions and mining. Ongoing and future regulatory actions could effectively prevent our customers' mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete. Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.
The COVID-19 pandemic has had unpredictable and unprecedented impacts in
the United Statesand around the world. The implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. The economic effects of the pandemic and any recovery and resulting societal changes, including the impact of current labor shortages in the United States, are currently not predictable, and the future financial impacts could vary from those foreseen. To the extent we are providing maintenance and repair services to our customers, our ability to provide such services may also be hampered by supply chain and labor disruptions. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America("GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 3 – Basis of
Presentation and Significant Accounting Policies, of the Notes to Consolidated
Financial Statements of this Quarterly Report on Form 10-Q.
Hosting Operation Highlights
January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 millionand $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively. 1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure. We 28 -------------------------------------------------------------------------------- Table of Contents are the managing member of 1.21 Gigawatts and are responsible for all site development, construction and operations of the datacenters. However, certain activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of 90% of the then outstanding units of each such entity. As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts. 1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member. Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of other members to purchase some or all of such units. Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our Common Stock equal to the capital contributions by Antpool in connection with the acquisition of such units divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts. On February 2, 2022, we brought our North Dakotafacility online as to the first 55MW, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022. Crypto Mining Operations On March 9, 2022, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. Total proceeds from the sale of the equipment were $1.6 million, and the Company will recognize a loss $2.9 millionon the sale of the equipment during the quarter ending May 31, 2022. The Company has no plans to return to crypto mining operations in the future as we grow our co-hosting operations. The results of the crypto mining operations are accounted for as discontinued operations in our consolidated financial statements as of and for the period ended February 28, 2022. Expansion Opportunities
definitive agreements by the parties. Construction of the facility began in
We are exploring potential new locations where we intend to replicate our hosting business model. Additionally, we are evaluating potential partnerships with owners of low-cost energy sources, with a particular focus on renewable sources, as a potential avenue to grow our hosting operations. As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry. We have begun to investigate the possibility, costs and benefits of converting to a REIT structure. Public Offering and Changes to Equity On
August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC(Reg. No. 333-258818) (the "Resale Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC(Reg. No. 333-261278) (the "IPO Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On April 11, 2022, the Company filed a registration statement for the Common Stock under the Securities Exchange Act of 1934, as amended, with the SECwhich became effective automatically on April 12, 2022. On April 12, 2022, concurrent with receipt of the notice of effectiveness for the Resale Registration Statement, all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were automatically converted (without payment of additional consideration) into fully paid and non-assessable shares of Common Stock, consistent with the Series C and Series D Preferred Stock terms. All rights with respect to the Series C and Series D Preferred Stock terminated upon conversion.
The Company’s board of directors approved a reverse split of shares of the
Company’s common stock on a one-for-six basis, which was effected on
29 -------------------------------------------------------------------------------- Table of Contents Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company's common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share.Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share. On
April 13, 2022, the Company announced its initial public offering of 8 million shares of its Common Stock at $5.00per share. The shares began trading on the Nasdaq Global Select Market on April 13, 2022, under the ticker symbol "APLD." On April 18, 2022, the Company completed its initial public offering. In addition, the Company granted the underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock at the public offering price, less underwriting discounts and commissions. The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $36 million. The Company intends to use the net proceeds to lease or purchase additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and for funding its working capital and general corporate purposes. 30
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Results of Operations Comparative Results for the Three and Nine Months Ended
The following table sets forth key components of the results of operations (in thousands) of
Applied Blockchainduring the three and nine months ended February 30, 2021and 2020. Three Months Ended Nine Months Ended February 28, February 28, 2022 February 28, 2021 2022 February 28, 2021 Revenues: Hosting revenue $ 1,026 $ - $ 1,026$ - Total revenue, net $ 1,026 $ - $ 1,026- Cost of revenues $ 2,073 $ - $ 2,073$ - Gross Profit (1,047) - (1,047) - Costs and expenses: Selling, General and Administrative 1,356 - 3,234 - Stock-based compensation for service agreement - - 12,337 - Depreciation 14 - 14 - Total costs and expenses 1,370 0 15,585 0 Operating loss (2,417) - (16,632) 0 Other income (expense): Interest Expense - (77) - (223) Gain on Extinguishment of Accounts Payable 80 - 405 - Loss on Extinguishment of Debt - - (1,342) - Income Tax Expenses (60) - (274) - Total Other Income (Expense) 20 (77) (1,211) (223) Net Loss from Continuing Operations (2,397) (77) (17,843) (223) Net Loss from Discontinued Operations (4,048) - (2,870) - Total Net Loss $ (6,445) $ (77) $ (20,713)$ (223) Adjusted Amounts (a) Adjusted Operating Loss from Continuing Operations $ (2,064) $ - $ (2,289)$ - Adjusted Operating Margin from Continuing Operations (201.17) % - % (223.14) % - %
Adjusted Net Loss from Continuing Operations $ (2,044) $
$ (3,500)$ (223) Other Financial Data (a) EBITDA $ (2,092) $ - $ (17,324)$ - as a percentage of revenues (203.9) % - % (1688.5) % - % Adjusted EBITDA $ (1,739) $ - $ (2,981)$ - as a percentage of revenues (169.5) % - % (290.6) % - % (a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A. 31
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Commentary on Results of Operations Comparative Results for the Three Months
For the three months ended
February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the three months ended February 28, 2021. Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. All of the Company's revenues were generated from its North Dakotafacility which became operational on February 2, 2022. Costs and expenses Cost of revenues for hosting for the three months ended February 28, 2022, was $2.1 millionand there were no hosting costs for the three months ended February 28, 2021. The costs consisted primarily of electricity costs, including costs for the North Dakotafacility under noncancelable purchase commitments prior to the facility becoming operational on February 2, 2022. Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility. Selling, general and administrative expenses during the three months ended February 28, 2022were $1.4 millionand there were no selling, general, and administrative expenses during the three months ended February 28, 2021. The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs.
Other income and expense:
Other income for the three months ended
February 28, 2022was $20 thousandand other expense for the three months ended February 28, 2021was $77 thousand. The change is primarily related to a decrease in interest expense due to the conversion of a related party note payable into Common Stock during the first fiscal quarter of the year ending May 31, 2022, as well as a gain recognized in the extinguishment of accounts payable, partially offset by an increase in income tax expense.
Commentary on Results of Operations Comparative Results for the Nine Months
For the nine months ended
February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the nine months ended February 28, 2021.Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. All of the Company's revenues were generated from its North Dakotafacility which became operational on February 2, 2022. Costs and expenses: Cost of revenues for hosting for the nine months ended February 28, 2022, was $2.1 millionand there were no hosting costs for the nine months ended February 28, 2021. The costs consisted primarily of electricity costs, including costs for the North Dakotafacility under noncancelable purchase commitments prior to the facility becoming operational on February 2, 2022. Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility. Selling, general and administrative expenses during the nine months ended February 28, 2022were $3.2 millionand there were no selling, general, and administrative expenses during the nine months ended February 28, 2021. The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs. 32
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Stock-based compensation during nine months ended
agreement for the first fiscal quarter in the year ending
Other expenses for the nine months ended
February 28, 2022was $1.2 millionand other expense for the nine months ended February 28, 2021was $223 thousand. The change is primarily related to a loss recognized on the extinguishment of a related party note to Common Stock during the first fiscal quarter of the year ended May 31, 2022, as well as recognition of income tax expense during 2022, partially offset by a reduction of interest expense due to the conversion of a related party note payable to Common Stock during the first fiscal quarter of the year ended May 31, 2022, and gains recognized on the extinguishment of accounts payable. 33
Table of Contents Three Months Ended Nine Months Ended February 28, $ in thousands February 28, 2022 February 28, 2021 2022 February 28, 2021 Adjusted operating loss Operating Loss from Continuing Operations (GAAP) $ (2,417) $ -
$ (16,632)$ - Add: Stock-based compensation for service agreement - - 12,337 - Add: Gain on Extinguishment of Accounts Payable (80) - (405) - Add: Loss on Extinguishment of Debt - - 1,342 - Add: Non-deferred professional service costs 433 - 1,069 - Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ (2,064) $ - $ (2,289)$ - Adjusted operating margin from Continuing Operations (201.2) % - % (223.1) % - % Adjusted net income (loss) Net Loss from Continuing Operations (GAAP) $ (2,397) $ (77) $ (17,843)$ (223) Add: Stock-based compensation for service agreement - - 12,337 - Add: Gain on Extinguishment of Accounts Payable (80) - (405) - Add: Loss on Extinguishment of Debt - - 1,342 - Add: Non-deferred professional service costs 433 - 1,069 - Adjusted net loss from Continuing Operations (Non-GAAP) $ (2,044) $ (77) $ (3,500)$ (223) EBITDA and Adjusted EBITDA Net Loss from Continuing Operations (GAAP) $ (2,397) $ (77) $ (17,843)$ (223) Add: Interest Expense - 77 - 223 Add: Income Tax Expense 60 - 274 - Add: Depreciation 245 - 245 - EBITDA (Non-GAAP) $ (2,092) $ - $ (17,324)$ - Add: Stock-based compensation for service agreement - - 12,337 - Add: Gain on Extinguishment of Accounts Payable (80) - (405) - Add: Loss on Extinguishment of Debt - - 1,342 - Add: Non-deferred professional service costs 433 - 1,069 - Adjusted EBITDA (Non-GAAP) $ (1,739) $ - $ (2,981)$ - EBITDA and Adjusted EBITDA "EBITDA" is defined as earnings before interest, taxes, and depreciation and amortization. "Adjusted EBITDA" is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, and one-time professional service costs not directly related to the company's offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A. These costs 34
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have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of
Applied Blockchain'sperformance that is neither required by, nor presented in accordance with, GAAP. Applied Blockchainbelieves that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Blockchainmay incur future expenses similar to those excluded when calculating these measures. In addition, Applied Blockchain'spresentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Blockchain'scomputation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Blockchaincompensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate Applied Blockchain'sbusiness. The Sources of Liquidity We have generated cash from the sale of our convertible preferred stock, the sale of Ether generated from our discontinued mining operations, and the receipt of contractual deposits and revenue pre-payments from hosting customers. Since December 2020, when we began planning to acquire or build an operational business, we have raised aggregate gross proceeds of $49 millionfrom issuances of our convertible preferred stock. On April 15, 2021, we received $16.5 millionin gross proceeds from the issuance of our Series C Convertible Redeemable Preferred Stock and on July 30, 2021, we received $32.5 millionin gross proceeds from the issuance of our Series D Preferred Stock. On April 18, 2022, we received $40.0 millionin gross proceeds from the issuance of 8 million shares of the Company's Common Stock in conjunction with the closing of our initial public offering. During fiscal year 2021, we did not generate any revenue from crypto mining, co-hosting or otherwise. We have incurred net losses from operations. In June 2021, as a result of commencement of our crypto mining operations, we began to generate revenue. As of February 28, 2022and May 31, 2021, we had cash of $12 millionand $11.8 millionrespectively, and an accumulated deficit of $(52.5) millionand $21.6 million, respectively. On March 11, 2022, we entered into a term loan agreement for $7.5 millionfor a term of five years with an interest rate of 5% per annum. The proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.
Having ceased our prior operations in 2014, we have experienced net losses until the first quarter of our fiscal year ending
May 31, 2022, with net losses also heaving been incurred in the second and third quarters of our fiscal year ending May 31, 2022. Our transition to sustained profitability is dependent on successful operation of our co-hosting facilities. We believe that amounts we received from our April 2021and July 2021sales of convertible preferred stock, from our crypto mining operations, prior to cessation of such operations on March 9, 2022, proceeds from our initial public offering, and revenue we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online as to 55MW on February 2, 2022, after planned expenditures to build our co-hosting operations, will be sufficient to meet our working capital needs for at least the next 12 months. We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company. We also expect that our revenues will increase as we continue to bring online additional capacity, including the remaining 45MW of capacity at our first operational co-hosting facility. We expect to need additional capital to fund continued growth, which we may obtain through one or more equity offerings, debt financings or other third- 35
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party funding. Because of the numerous risks and uncertainties associated with the crypto mining industry, we are unable to estimate the amount of increased capital we may need to raise to continue to build additional co-hosting facilities and we may use our available capital sooner that we currently expect. We believe that our existing cash, together with the anticipated revenues from current operations, will enable us to fund our operating expense requirements through at least 12 months. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
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